Kenya’s banking sector has undoubtedly seen robust growth characterised by expansion plans and diversification into new revenue streams. This has necessitated more stringent regulatory framework and supervision, in an effort to not only protect the economy but also the interests of the bank customers.

The recent collapse of two banks, namely Dubai Bank and Imperial bank(which have been placed under receivership by the CBK of Kenya(CBK)) in a span of four months, is evidence of the dire need for a strong regulatory and supervision framework in the banking sector, the amendments to the BA are therefore aimed at achieving this. Some of the salient provisions of these amendments include:

Definitions

A ‘significant shareholder’ was initially described under the BA to mean a person, other than the Government or public entity, who holds or otherwise has a beneficial interest amounting, in more than 5% of the share capital of an institution. The amendment to the BA has extended the definition to include:

  • the significant shareholders of a corporate entity seeking to become an institution; and
  • the share capital to 5% or more as opposed to ‘more than 5% of the share capital’

The impact of this amendment is that significant holders of a corporate entity, that is seeking to become a finance institution will be subjected to moral suitability vetting by the CBK as well as credit advance restrictions.

Licensing of institutions

Provisions dealing with the renewal of licence applications have been repealed; an institution is instead required to pay annual fees as prescribed by the CBK. The institution is liable to pay double the annual fees if it fails to pay the annual fees by the end of the financial year. Failure to pay within 90 days after the end of the financial year, the institution’s licence will be revoked. This means that the banking institutions will not have to go through a tedious process of licence renewal but instead pay an annual fee. Moreover, the CBK will not have the discretion to refuse the renewal. However, interestingly there is no provision for appealing the decision of the CBK to revoke the licence upon failure of the institution to pay the annual fees.

Vetting of directors, significant shareholders etc

The CBK has the discretion to vet not only significant shareholders, but now a non-significant shareholder, if the Bank has reason to believe that such shareholder has reduced its shareholding in an institution to below 5% in order to avoid vetting or the shareholder exercises control of the institution or corporate entity through his or its associates. Control entails the ability to influence the management, a corporate shareholder or the decisions of the shareholders. The effect of this amendment is such that any investor that is seen to have control of an institution may be the subject of vetting by the Bank. The regulator’s intention is to weed off shadowy investors, that influence institutions or engage in fraudulent activities. Such investors face the prospect of forfeiting their voting rights and having their shares sold, among other penalties.

Restrictions on ownership of share capital of an institution

The BA provides that no person other than certain entities are to hold or have beneficial interest of more than 40% of the share capital of an institution, except with the authorization of the CBK but upto a maximum of 70%. The provision now provides that a “person” shall include the person’s associates. This means that the restriction on ownership is not only limited to an individual but any family member or any company controlled by the person.

Powers of the CBK to Intervene in Management

There are circumstances where the CBK is permitted to intervene in the management of an institution, for example, if the institution fails to meet its financial obligations or a petition is filed for the winding up of the institution. Previously, the Bank could appoint a competent person familiar with the business of the institution, to assume management, control and conduct of the institution. The amendment now provides that the Bank is to appoint Kenya Deposit Insurance Corporation(KDIC) to assume the management. Similarly, if an institution goes into voluntary liquidation, KDIC is to oversee the process. The impact of this amendment is to ensure that institutions under receivership or liquidation are managed by a single body appointed under legislation; creating consistency where the CBK need not appoint different persons to oversee this role. The amendments have prohibited the CBK from placing an institution under statutory management for a period exceeding 2 years. Plus, that a manager shall also not serve in such an office exceeding the same period. The penalty provision with respect to this restriction has also been done away with. It will now be open to interpretation that the CBK can now place an institution under statutory management with no limits as to the time period. As statutory management takes over the rights of shareholders and creditors as well as directors, the effect is that these rights may be curtailed for an uncertain period.

Expenses related to inspection and control

The amendments have done away with the provisions in respect to expenses payable by institutions which were incurred by reason of exercising powers in the inspection and control of institutions. Further, the provision stating that institutions under liquidation shall not be required to provide security of costs in any suit has been repealed. This is a positive amendment which limits the institutions’ liability for expenses which the CBK or KDIC incur in the processes of inspections, vetting and management.

Deposit Protection Fund Board

The provisions with respect to the objects and functions of the Deposit Protection Fund Board(DPFB), remuneration of DPFB members and protection from personal liability of a member of the DPFB have been repealed.

Limitation of claims

The BA previously provided that the claim for payment of protected deposit must not be brought after the expiry of 2 years and a claim for payment of dividends must not be brought after the expiry of 1 year from the date of publication of commencement of such payment by the DPFB. These provisions have now been repealed, the effect is such that creditors can claim for payments with no limitation of time.